$4bn Medibank Private float due within 15 months

The privatisation of Medibank Private, estimated to be worth $4 billion, could invigorate a sharemarket hungry for new opportunities and deliver a temporary boost to the federal budget.

The government plans to float the health insurer within 15 months and is preparing to hire investment bankers and lawyers. It will be the largest government business to go public since Queensland sold rail freight operator QR National in 2010. That company is now called
Aurizon
and was a success for early investors.

Finance Minister
Mathias Cormann
said an independent scoping study had reaffirmed the Coalition’s long-held view there was no good reason to keep the company in government hands.

Analysts say it is likely the private health insurer has maintained the $4 billion valuation placed on it by the Howard government in 2007.

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“Unlike in private equity, there are very few incentives for managers in Medibank Private to cut corners to dress it up for the sale," he said.

“It’s likely to have a few less nasty surprises."

After a period of low growth, Medi­bank posted an 84 per cent increase in net profit after tax in 2012-13 from the previous year to $232.7 million.

Medibank chief executive George Savvides welcomed the sale, and said it would not affect the health insurer’s daily operations.

“We welcome the Government’s decision today, we’re 37 years old, we have a wonderful inheritance and a brand that people trust. Let me reassure you that the Medibank Australians have trusted for years is the very same Medibank that will continue to look after your health well into the future," Mr Savvides said.

Terry Barnes
, a former adviser to Prime Minister
Tony Abbott
who worked on the preparation for a potential sale of Medibank in 2006, said he believed the sale was being rushed.

Healthcare rebates should be restored in full first and not means tested, a step that would encourage more members to sign up and increase Medibank’s valuation, he argued.

“An IPO before the anti-competitive mess of the private health insurance industry regulation and subsidy is cleaned up will not net the best price for the government," he said.

The timing of the sale and release of a prospectus has not yet been set, nor the number of shares that will be allocated to retail and institutional investors.

“With a focus on evolving market conditions, we’ll make a judgment, and when we’re satisfied that the most appropriate window for a sale is present to maximise net proceeds and achieve all of the other objectives the government has in relation to that sale, then we’ll move ahead," Senator Cormann said.

Senator Cormann predicted wide-ranging interest from investors but said no individual would be able to purchase more than 15 per cent of the shares.

The proceeds from the sale will be included as revenue in the 2014-15 budget but how much it is worth will not be obvious in the budget papers.

The sale will give a temporary boost to the government’s finances but it will permanently lose dividends from one of its most profitable assets. Medibank paid $675.9 million to the Labor government in its last three years in office .

“The impact on deficit from today’s decisions is quite straight forward. The government in one move adds in the order of about half a billion dollars to Australia’s deficit each year," shadow finance minister
Tony Burke
said.

When floated Medibank will join NIB as the only listed health insurers in Australia. Three new board members have been added to the Medibank board in preparation for the sale, including lawyer
David Fagan
, corporate adviser
Linda Nicholl
s and CSL director
Christine O’Reilly
. Two existing board members, GP
Leanne Rowe
and Telstra director
Steve Vamos
, have taken early retirement to make room for the additions.

Senator Cormann said there was no reason to suggest health insurance premiums would rise because of the sale.

“Medibank would need to continue to compete against other funds for customers and would need to continue to comply with all of the relevant regulatory requirements around premium change," he said.

Separately, as the major parties continued to trade barbs over the budget, the government produced figures combating Labor modelling that showed the budget would be in surplus within five years and reach a $34 billion surplus by 2023 if the government maintained the same assumptions and policy settings used by Treasury in the Pre-Election and Fiscal Outlook.

Crucially, this modelling assumed spending growth would be capped at 2 per cent, in line with Labor’s stated ambition.

But spending was set to accelerate well beyond 2 per cent to 6 per cent in 2017-17. By 2023-24, the budget would be $55 billion worse off than the PBO modelling claimed.